Mexican Bonds Rally on Weaker-Than-Forecast GDP; Peso Advances

Mexico’s peso bonds rose, pushing yields down the most in two weeks, as slower-than-forecast economic growth fueled speculation that the central bank will reduce borrowing costs.

Yields on bonds due in 2024 fell for the first time in seven days, dropping 10 basis points, or 0.10 percentage point, to 6.25 percent today, according to data compiled by Bloomberg. The peso appreciated 0.8 percent to 12.9745 per U.S. dollar, rebounding from a seven-week low.

Gross domestic product expanded 1.5 percent in the second quarter from a year earlier, the national statistics institute reported today. The increase was smaller than all of the forecasts of 17 economists surveyed by Bloomberg. Mexico’s government cut its growth forecast today for Latin America’s second-biggest economy to 1.8 percent this year, down from a previous projection of 3.1 percent.

“With that GDP number out there, there’s certainly going to be an increasing part of the market that’s going to say, ‘We think that the central bank is going to cut,’” Vivienne Taberer, a money manager who helps oversee $14 billion in emerging-market assets at Investec Asset Management, said by phone from Cape Town.

Traders are assigning a 16 percent chance of a reduction in the next six months, according to swap-rate contracts used to speculate on borrowing costs. At the end of last month, the contracts showed no possibility of a cut, according to data compiled by Bloomberg.

Treasuries Correlation

Mexico bonds are also following Treasuries higher, according to Taberer. Investors will study the release tomorrow of minutes of the U.S. Federal Reserve’s July 30-31 meeting for signs of when it will begin to reduce the $85 billion pace of monthly bond purchases.

The 30-day correlation coefficient between 10-year peso bonds and similar-maturity Treasuries rose to 0.68 today after having a negative correlation as recently as May 2, according to data compiled by Bloomberg. A reading of 1 would signal that the securities moved in lockstep. Mexico sends about 80 percent of its exports to the U.S.

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